Today our 10 largest banking companies hold some two-thirds of the nation's banking assets, and some are enormously complex. Continental had less than 2% of the nation's banking assets, and by today's standards it was a plain-vanilla bank. This is important for three reasons.

First, any bank we nationalize will be forced, both by the regulators and the marketplace, to shrink dramatically. We are in the middle of a serious economic downturn where deflation is a realistic concern. Do we really think that dismantling our largest banks would be helpful? I don't.

What's more, we won't be able to stop at nationalizing one or two banks. ***

Second, for nationalization to work there needs to be a reasonable exit strategy. In the case of Continental, we had scores of options for returning the bank to private hands, including a public offering or a sale to any number of domestic and foreign banks and investor groups.

Today, who has the wherewithal, legal authority, and desire to purchase our largest banks? No one comes to mind, particularly if we rule out foreign groups, which I suspect would not pass muster due to national security concerns about ceding that much power over our economy to foreign powers.

Third, who will run these companies when we dismiss the existing senior managers and board members? We had significant difficulties attracting quality people to Continental even without today's limits on compensation.

So-called experts frequently cite the success of the Swedish experience with bank nationalization in the last decade. Nothing could be less relevant. Sweden's population, economy and banking system are roughly the size of Ohio's. Sweden's largest bank is roughly 10% the size of each of our three largest banking companies. Moreover, Sweden nationalized only Gota Bank -- and that was after it had already collapsed.

The Obama administration should declare that nationalization of any major bank is off the table . . .

The guy with the most experience of nationalizing banks in the U.S. says it won't work and we shouldn't do it.

Will our leaders listen?

Note: A reader quoted Senator Bernie Sanders: "If a company is too big to fail, it is too big to exist." Several readers argue that Isaac is wrong, and that the big banks should indeed be downsized.

3 comments:

I think I leaders should recognize Isaac's statement as close-minded and narrowly conceived. He is thinking squarely inside the box.

First, the "too big to fail" banks need to shrink dramatically. We can allow that to happen via bankruptcy (obviously stupid) or we can funnel billions into them to mask their true state for awhile. Why not shrink them intentionally and carefully under adult supervision?

Second, there is an exit strategy as long as you don't assume the big banks have to stay big. Citigroup could be broken up into an investment bank, an insurance company, a credit card company and several regional banks. Each of those would likely find a buyer.

Third, let's understand that the board members do very little to begin with. The senior managers have demonstrated their incompetence. Obviously the unlimited compensation of the last decade has not been helpful to the industry. My guess is that there are several bank executives with actual competence that would be happy to run Citi or BofA for a year or so even for the poverty wage of $500K.

Why is any corporation in this country "Too big to fail"? Surely that's one of the reasons for the economic problems we're having right now? What happened to not allowing monopolies to exist? no corporation should be alowed to get "too big to fail"! Period!

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